Why you don’t need a financial plan

It stands to reason that not everyone needs a financial plan or relationship with a financial planner. There might be various reasons for this. However, perhaps the best way to answer this question, i.e. “who doesn’t need a financial plan” is to discuss what’s involved in a plan and then you can draw your own conclusions. Watch the video and/or read the text below.

So, what’s involved in a financial plan?

A financial plan is simply the process of measuring the short, medium and long-term impact of your past financial decisions/investments (or lack thereof) thereby allowing you to take corrective action today.

The foundation of the financial planning process is the development of a financial model. A financial model projects your future income, expenses, assets and liabilities and, using conservative assumptions, allows you to measure whether you will be able to enjoy a comfortable retirement. If you don’t like the results the financial model produces, you can measure the impact of various investment tactics that you might like to adopt e.g. contribute more into super, buy an investment property, invest in the share market and so on.

Of course, you must have a robust methodology supporting each individual investment tactic. I am a strong believer in adopting evidenced-based investment strategies (I will soon publish a whitepaper discussing the benefits of evidenced-based investing so look out for this if you would like to know more). Not only do I believe that evidenced-based strategies increase the likelihood of success, it will be far easier to determine what conservative investment return assumptions to use in the financial model. Sometimes a small change in assumptions can have a large compounding impact on the long-term results.

Realistically, most people will not have the experience, knowledge, time and skill to complete the financial modelling themselves and will need to engage an independent financial planner to do this.

Of course, the strategy must meet YOUR goals

Investing without a plan is tantamount to driving around without a destination in mind – what’s the point! As Stephen Covey recommends in his best-selling book 7 Habits of Highly Effective People, “begin with the end in mind”. That means, think about what you would like to achieve and by when. You might already have a very clear idea of what you would like to achieve (financially) in retirement and by when. However, if you are like 80-90% of people I meet, you probably have no idea so let me help.

The first thing I will say is that some goals are better than none – so don’t beat yourself up if you are struggling with this. Goals will become clearer over time. Secondly, the two main goals you need to set are:

How much will you need for living expenses in retirement? For this one, the best amount to use is what you are spending today – it’s a good proxy for what you will need in retirement. If you don’t know what you are currently spending, you’ll have to work it out; and
When you would like to have the flexibility to stop working. I would caution people from setting this goal much later than between 60 and 65 years of age as, at that stage, ill-health might prevent you from working. Most people I meet don’t want to cease work in totality. Instead, they would prefer a phased transition into retirement e.g. they might reduce to 3 days per week after 60. Keep this in mind. In the absence of having a clearer goal, I suggest you go with age 60 as that’s when you’ll be able to access super.

Mapping out an action plan

Once you have completed the first two steps you can then formulate an action plan i.e. things you need to work on over the coming 12 to 24 months. These might include:

Reviewing the performance of existing investments to ensure they are providing investment-grade returns. If there is any doubt, you might lower your assumptions in the financial model to see if it has a material impact and/or consider divesting and replacing the under-performing investments.
Switching your super into (1) a very low-cost environment and (2) ensuring your super is invested passively. For most people, reducing fees and maximising investment returns on superannuation produces a far greater positive financial impact than making additional contributions.
Maybe you need to improve your cash flow management. Nine times out of 10 merely tracking your expenditure levels is all that’s required – you can’t manage what you don’t measure. Here are some more cash flow management tips.
Finally, you need to think about all the things that can go wrong and take steps to reduce the financial impact if these things occur. This includes ensuring wills are up-to-date, superannuation death benefit nominations are current, you have adequate life, TPD and income protection insurance and you have considered any asset protection risks.

I counsel you on trying to do too much all at once. Instead, make a list of all the things that need to be done and schedule to do them over the next 12 to 24 months. Do the most important things first.

Is ongoing advice/coaching necessary?

Some people think that once they have a plan, they don’t need any further advice. Again, this might be true for some people with very simplistic financial affairs, but most people will benefit from some level of ongoing advice and oversight (doesn’t have to cost you an arm and a leg):

It will be necessary to make tactical tilts over time. A tactical tilt is an adjustment (usually small) to your asset allocation based on the valuation of the markets in which you are invested. For example, at the moment, the US CAPE (cyclically adjusted price-to-earnings) ratios are at levels previously reached only in 1929 and during the tech bubble so, arguably it makes sense to consider being underweight US investments at the moment – this is a bit technical but a good, very recent example. It is important that someone (independent) is looking after your best interests and keeping an eye on these things – not jumping at shadows – but making sure your money is always astutely invested.
It is important to review the performance of your investments and compare it to where we expected it to be so that any corrective action can be taken as soon as possible. This sounds easier to do than in practice. This is because financial models project on a straight-line basis whereas markets rarely move in a straight-line basis. Therefore, its critical to “understand” the returns/performance in order to assess it (here’s a good example of this).
Often, change brings opportunity. Therefore, it is important to look for opportunities created by any changes in markets, products, superannuation rules, tax laws and so on.
No doubt your circumstances, desires and goals will evolve and change over time. Therefore, we must ensure that, as a result, any necessary adjustments to your financial strategy are made on a timely basis.
We must keep you on the straight and narrow (avoiding procrastination/delay) and avoid getting distracted by shiny objects. In short, prevent you from making mistakes.

Once you have mapped out your financial plan, you will understand what direction you are heading and how to get there. The road might be bumpy at times. Things will change. Laws and products will change. But, a good, independent financial planner will coach you through these and keep you focused on the plan.